6th Norges Bank Monetary Policy Conference June 2009 Discussion Christopher Kent Reserve Bank of Australia Heterogeneous Expectations, Learning and European Inflation Dynamics Anke Weber

What the paper shows… Based on consumer and professional inflation survey data for selected euro area countries: Constant gain learning is ‘reasonable’ Higher inflation countries have higher gains – more weight on more recent data Professionals have higher gains than households Expectations have not ‘converged’ across all countries

Learning Learning is a ‘one-way street’ in the model – that is, there is no feed back from learning to outcomes, and back to learning. – feedback/self referential learning requires a more complex, multiple equation model – may help to better interpret the results, e.g., link constant gain estimates to persistence of inflation?

Heterogeneous expectations Results suggest that learning speed differs across agents – households and experts – and across countries But, which agents matter more for prices/wages? And, does cross-country variation reflect plausible structural differences?

European inflation dynamics Implications of differences in constant gains Table 4 (monthly, average across models) – Households gain‘weights’ Germany in Dec-06½ in Oct-60 Spain in Dec-06½ in Dec-05 Table 9 (quarterly, average across models) – Experts gain‘weights’ Germany in Dec-06½ 6-7 qtrs prior Italy in Dec-06½ 4-5 qtrs prior

Table 1: Beta estimates from Tables 15 and 17 versus Inflation HICP Inflation (per cent) Final state(average)(weighted average, HH’s Table 4) HouseholdsExperts (monthly, year-on-year) Germany France Italy Netherlands Spain Euro area European inflation dynamics Convergence of expectations

Price Level Index Eurostat data, average across 204 goods and services Source: M Berka and M Devereux (2009), ‘European Real Exchange Rates: Revisited’

European inflation dynamics Convergence of expectations